island heritage insurance company, ltd. (incorporated in...
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ISLAND HERITAGE INSURANCE COMPANY, LTD. (Incorporated in the Cayman Islands) Consolidated financial statements
31 December 2017
PricewaterhouseCoopers, 18 Forum Lane, Camana Bay P.O. Box 258, Grand Cayman, KY1- 1104, Cayman Islands T: +1 (345) 949 7000, F: +1 (345) 949 7352, www.pwc.com/ky
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Independent auditor’s report To the Board of Directors of Island Heritage Insurance Company, Ltd.
Our opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of Island Heritage Insurance Company, Ltd. (the Company) and its subsidiaries (together the Group) as at 31 December 2017, and their consolidated financial performance and their consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards.
What we have audited
The Group’s consolidated financial statements comprise:
the consolidated statement of financial position as at 31 December 2017;
the consolidated statement of comprehensive income for the year then ended;
the consolidated statement of changes in equity for the year then ended;
the consolidated statement of cash flows for the year then ended; and
the notes to the consolidated financial statements, which include significant accounting policies.
Basis for opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence
We are independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code). We have fulfilled our other ethical responsibilities in accordance with the IESBA Code.
Responsibilities of management and those charged with governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group’s financial reporting process.
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Independent auditor’s report (continued)
Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.
Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
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Independent auditor’s report (continued)
Other Matter This report, including the opinion, has been prepared for and only for the Company in accordance with the terms of our engagement letter and for no other purpose. We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
April 10, 2018
ISLAND HERITAGE INSURANCE COMPANY, LTD. Consolidated statement of financial position As at 31 December 2017 (in thousands of United States dollars) _________________________________________________________________________________________________
The accompanying notes are an integral part of these consolidated financial statements.
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Notes 2017$
2016$
Assets Cash and cash equivalents 6 121,079 31,439Fixed deposits 7 2,020 2,000Regulatory assets 7 13,604 5,762Investments 8 21,464 20,389Insurance receivables and other assets 9 78,509 35,019Deferred policy acquisition costs 10 7,364 7,310Reinsurance assets 11 578,459 59,753Tax receivable 1,341 477Deferred tax asset 13 644 -Property and equipment 12 8,862 9,398Intangible assets 14 174 274 Total assets 833,520 171,821 Liabilities Other liabilities 15 175,833 26,648Due to affiliates 20 9,969 14,995Deferred tax liability 13 - 38Insurance contract liabilities 16 594,428 80,426
Total liabilities 780,230 122,107 Equity Share capital 17 321 321Contributed surplus 17 39,882 29,612Retained earnings 13,087 19,781 Total shareholder’s equity 53,290 49,714
Total liabilities and equity 833,520 171,821 Approved by the Board of Directors on April 10, 2018
ISLAND HERITAGE INSURANCE COMPANY, LTD. Consolidated statement of comprehensive income For the year ended 31 December 2017 (in thousands of United States dollars) _______________________________________________________________________________________________
The accompanying notes are an integral part of these consolidated financial statements.
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Notes
2017
$ 2016
$INCOME Gross premiums written 93,955 92,596Reinsurance ceded (87,988) (68,380) Net premiums written 5,967 24,216Net change in unearned premiums 16 6,199 831 Net premiums earned 12,166 25,047 Investment income 8 1,447 884Commission and other income 13,733 12,609Rental income 25 26
Total income 27,371 38,566 EXPENSES Insurance contracts benefits and expenses Short term claim and adjustment expenses 18 8,495 10,543Commission and acquisition expense 17,194 18,353Operating expenses 19 9,249 9,981Amortisation expense 12 & 14 708 719Total benefits and expenses 35,646 39,596 Loss before income taxes (8,275) (1,030)
Income taxes 13 1,581 (117)
Net loss for the year (6,694) (1,147)
ISLAND HERITAGE INSURANCE COMPANY, LTD. Consolidated statement of changes in equity For the year ended 31 December 2017 (in thousands of United States dollars) _________________________________________________________________________________________________
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Notes 2017
$ 2016
$ Share capital – beginning and end of year 17 321 321 Contributed surplus Balance – beginning of year 29,612 29,411 Capital contribution received from Parent 17 10,000 - Share grants issued under equity incentive plan 270 201 Contributed surplus – end of year 17 39,882 29,612 Retained earnings Balance - beginning of year 19,781 20,928 Net loss for the year (6,694) (1,147) Balance – end of year 13,087 19,781 Total equity attributable to shareholders of the company 53,290 49,714
The accompanying notes are an integral part of these consolidated financial statements.
ISLAND HERITAGE INSURANCE COMPANY, LTD. Consolidated statement of cash flows For the year ended 31 December 2017 (in thousands of United States dollars)
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Notes
2017
$ 2016
$
Cash flows from operating activities
Loss before income taxes (8,275) (1,030)
Adjustments for: Investment (income)/loss (13) 22Net realised loss on investments 8 (79) (38)Change in fair value of investments 8 (619) (352)Amortisation of property and equipment 12 608 619Amortisation of intangible assets 14 100 100Loss on sale of property and equipment 12 - 27Compensation expense related to shares and options 270 201Changes in assets and liabilities: Insurance receivables and other assets (43,490) (12,825)Due to/from affiliates * 4,974 7,685Deferred policy acquisition costs (54) (850)Reinsurance assets (518,706) (32,543)Insurance contract liabilities 514,002 32,032Other liabilities 149,185 8,340
Cash generated from operations 97,903 1,388Income taxes paid 35 (871)Net cash generated from operating activities 97,938 517
Cash flows from investing activities
Purchase of regulatory assets (7,842) 8,575Purchase of investments (4,117) (4,593)Proceeds from sales of investments 3,753 4,998Fixed deposits (20) (2,000)Acquisition of property and equipment 12 (72) (56)Proceeds from sale of intangible assets 14 - 34Net cash (used)/generated for investing activities (8,298) 6,958 Increase in cash and cash equivalents 89,640 7,475
Cash and cash equivalents - beginning of year 6 31,439 23,964
Cash and cash equivalents - end of year 6 121,079 31,439
* Refer to Note 17 for the non-cash portion in this balance.
The accompanying notes are an integral part of these consolidated financial statements.
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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1. NATURE OF THE GROUP AND ITS BUSINESS
Island Heritage Insurance Company, Ltd. (the “Group” or “IHIC”) was incorporated pursuant to the Companies Law of the Cayman Islands on January 4, 1996 as an ordinary company with limited liability. A change of direct ownership occurred during 2016, with the merger of Island Heritage Holdings Limited (“IHHL”), into BF&M General Insurance Company Limited (“BF&M General”) with BF&M General being the surviving entity effective July 24, 2016 and therefore the immediate parent of the Company. BF&M General is a wholly owned subsidiary of BF&M Limited (“BF&M”), the ultimate parent, a Bermuda domiciled insurer. BF&M Limited had originally acquired 100% of the IHHL on March 30, 2012.
The Group’s principal business is property, motor and casualty insurance. It determines and charges a premium to policyholders which, taken as a pool with all other policyholders, is expected to cover underwriting costs and claims which may take a number of years to settle. The business risks of insurance reside in determining the premium, settlement of claims, estimation of claim costs, and management of investment funds. To further mitigate underwriting risk, the Group purchases reinsurance to share part of the risks originally accepted by the Group in writing premiums. These reinsurance arrangements include Quota Share, Facultative, Risk Excess and Catastrophe Excess of Loss programmes. This reinsurance, however, does not relieve the Group of its primary obligation to policyholders. If any reinsurers are unable to meet their obligations under the related agreements, the Group remains liable to its policyholders for the unrecoverable amounts. The Group has the following subsidiaries:
% owned
Principal country ofoperation andincorporation
Island Heritage Insurance Company N.V. (Insurance Company) 100 CuracaoLawrence Boulevard Holdings Limited (Property Holding Company) 100 Cayman Islands Effective April 22, 1996, the Group was issued a Class “A” Insurance Licence by the Governor in Council of the Cayman Islands to carry on insurance business in the Cayman Islands. The registered office is Ugland House, South Church Street, Grand Cayman. The Group has subsequently been authorised to transact insurance business in the following territories: The British Virgin Islands on October 14, 1996 St. Kitts & Nevis on April 26, 2004 The U.S. Virgin Islands on March 3, 1997 Grenada on January 9, 2006 Turks and Caicos Islands on December 30, 1997 Antigua on March 27, 2006 Anguilla on May 19, 1998 Bahamas on July 17, 2000
St. Vincent & The Grenadines on October 16, 2006
Dominica on July 26, 2000 St. Lucia on November 10, 2006 Barbados on May 7, 2003 Caribbean Netherlands October 10, 2015 On April 10, 2018 the Board of Directors approved the financial statements and authorised them for issue.
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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2. SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.
A. STATEMENT OF COMPLIANCE
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued and adopted by the International Accounting Standards Board (“IASB”).
B. BASIS OF PREPARATION
i) Basis of measurement
The consolidated financial statements have been compiled on the going concern basis and prepared on the historical cost basis, as modified by the revaluation of financial assets and liabilities at fair value through profit or loss.
The consolidated statement of financial position is presented in order of liquidity.
ii) Critical Estimates, Judgements and Assumptions
The preparation of the Group’s consolidated financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. All estimates are based on management’s knowledge of current facts and circumstances, assumptions based on that knowledge and their predictions of future events and actions. It is reasonably possible, on the basis of existing knowledge, that outcomes within the next financial year that are different from the assumptions made could require a material adjustment to the carrying amount of the asset or liability affected. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which estimates are revised and in any future periods affected.
iii) Estimation of reinsurance premiums and commissions
The reinsurance policy is not coterminous with the financial year and the rates payable and associated commission vary dependent on results for the contract period as such there is a degree of estimation involved at the statement of financial position date in respect of the results expected in the unexpired period. Management compiles calculations considering the contractually agreed rates and estimation of loss development in order to estimate the reinsurance premiums and commissions at the year end. Key sources of estimation uncertainty and areas where significant judgements have been made are listed below and discussed throughout the notes to these financial statements including:
The estimate of the ultimate liability arising from claims under short‐term insurance contracts. Refer to Note 4B.
The Group operates within various tax jurisdictions where significant management judgments and estimates are required when interpreting the relevant tax laws, regulations and legislation in the determination of the Group’s tax provision and the carrying amounts of its tax assets and liabilities. Refer to Note 13.
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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C. CONSOLIDATION
i) Subsidiaries
Subsidiaries are all entities over which the Group has control. Control is defined as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Subsidiaries are fully consolidated from the date control is transferred to the Group and deconsolidated on the date control ceases. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. The Group applies the acquisition method to account for business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, equity instruments issued and liabilities incurred or assumed at the date of exchange, including liabilities arising from contingent consideration arrangements. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the consolidated statement of income. Acquisition‐related costs are expensed as incurred. Business combinations in which combining entities are ultimately controlled by the same party or parties both before and after the transaction, and that control is not transitory, are referred to as combinations under common control. Where there is a combination under common control, the Company applies predecessor accounting retrospectively. Assets and liabilities are incorporated at the carrying value of the ultimate controlling party. Intangible assets and contingent liabilities are recognized only to the extent they were previously recognized. The acquired entity’s results, are included in the acquirer’s financial statements at the beginning of the earliest comparative period, regardless of the effective date of the business combination. Intercompany transactions, balances, income and expenses between the combining entities are eliminated. Inter‐company transactions, balances and unrealised gains or losses on transactions between Group companies are eliminated on consolidation. When necessary, amounts reported by subsidiaries have been adjusted to conform with the Group’s accounting policies.
D. DETERMINATION OF FAIR VALUE
Fair value is determined based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is measured using the assumptions that market participants would use when pricing an asset or liability. When available, quoted market prices are used to determine fair value. If quoted market prices are not available, fair value is typically based on alternative valuation techniques such as discounted cash flows and other techniques. When observable valuation inputs are not available, significant judgement is required to determine fair value by assessing the valuation techniques and inputs. For bonds and fixed income securities, broker quotes are typically used when external public vendor prices are not available. Judgement is also applied in adjusting external observable data for items including liquidity and credit factors. A description of the fair value methodologies and assumptions by type of asset is included in Note 5.
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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E. FOREIGN CURRENCY TRANSLATION
i) Functional and presentation currency
Items included in the financial statements of the Group are measured using the currency of the primary economic environment in which the entity operates (the “functional currency”). The financial statements are presented in thousands of United States Dollars, which is the Group’s functional currency.
ii) Transactions and balances
Monetary assets and liabilities denominated in currencies other than the functional currency of the Company or its subsidiaries are translated into the functional currency using the rate of exchange prevailing at the balance sheet date. Income and expenses are translated at rates of exchange in effect on the transaction dates. Foreign exchange gains and losses are expensed in the consolidated statement of income.
F. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash in hand, deposits held on call with banks, other short‐term highly liquid financial assets with original maturities of three months or less, and bank overdrafts. The carrying value of cash and cash equivalents approximates their fair value.
G. FIXED AND REGULATORY ASSETS
Regulatory assets are held with Regulators as a legal requirement in order to provide services in the respective territories. Regulatory assets comprise of deposits and fixed income securities. Refer to Note 2(H) (i) (a) for the classification, recognition and subsequent measurement of fixed income securities held as regulatory assets. Fixed deposits are financial assets with maturity dates longer than 90 days and are held with financial institutions. The carrying value of regulatory assets and fixed deposits approximates their fair value.
H. FINANCIAL INSTRUMENTS
i) Financial assets
Classification, recognition and subsequent measurements of financial assets The Group classifies its investments into the following categories: a) financial assets at fair value through profit and loss (“FVTPL”), and b) loans and receivables. Management determines the classification at initial recognition and is dependent on the nature of the assets and the purpose for which the assets were acquired. a) FVTPL A financial asset is classified at FVTPL if it is designated as such upon initial recognition or is classified as held‐for‐trading. A financial asset can be designated as FVTPL if it eliminates or significantly reduces an accounting mismatch. A financial asset is classified as held‐for‐trading if it is acquired mainly for the purpose of selling in the near term or traded for the purposes of earning investment income. Attributable transaction costs upon initial recognition are recognised in investment income in the consolidated statement of income as incurred. FVTPL assets are measured at fair value and changes in fair value as well as realised gains and losses on sales are recognised in investment income in the consolidated statement of income. Dividends
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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earned on equities are recorded in investment income in the consolidated statement of income. b) Loans and receivables Loans and receivables are non‐derivative financial assets with fixed or determinable payments that are not quoted in an active market. Cash and cash equivalents, fixed deposits, regulatory assets, premium receivable, reinsurance receivable, broker rebate receivable, ceding commission receivable, investment income receivable, income tax receivable and other receivables are classified in this category. Financial assets are initially recognised at fair value and are subsequently carried at amortised cost using the effective interest rate method. Financial assets are derecognised when the rights to receive cash flows from them have expired or where they have been transferred and the Group has also transferred substantially all risks and rewards of ownership. Investment income Dividends on equity instruments are recognised in the consolidated statement of income on the ex‐dividend date. Interest income is recorded on the accruals basis, using the effective interest rate method, in investment income in the consolidated statement of income.
I. IMPAIRMENT OF ASSETS
i) Impairment of financial assets
The Group reviews the carrying value of its financial assets, except those classified as FVTPL, at each period end for evidence of impairment and reversal of previously recognised impairment losses. These assets are considered impaired if there is objective evidence of impairment as a result of one or more loss events that have an impact that can be reliably estimated on the estimated future cash flows of the asset and the financial assets carrying value exceeds the present value of the estimated future cash flows. Objective factors that are considered when determining whether a financial asset or group of financial assets may be impaired include, but are not limited to the following: (i) failure to make scheduled payments of capital and/or interest, (ii) adverse changes in the payment pattern of the borrower and (iii) significant deterioration in the fair value of the security underlying financial asset. a) Loans and receivables When loans and receivables assets carried at amortised cost are impaired, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. For all loans and receivables where an impairment loss has occurred, the carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognised in the consolidated statement of income. When an event occurring after the impairment was recognised causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed in investment income in the consolidated statement of income. ii) Impairment of non‐financial assets The Group’s non‐financial assets comprise property and equipment and intangible assets. Non‐financial assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Non‐financial assets that are subject to amortisation are reviewed for impairment whenever there is objective evidence of impairment. Objective evidence includes, but is not limited to the following: (i) adverse economic, regulatory or environmental conditions that may restrict future cash flows and asset
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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usage and/or recoverability; (ii) the likelihood of accelerated obsolescence arising from the development of new technologies and products; and (iii) the disintegration of the active market(s) to which the asset is related. If objective evidence of impairment exists, then the asset’s recoverable amount is estimated. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount and is recognised as part of amortization expense in the consolidated statement of income. The recoverable amount is the higher of an asset’s fair value less costs to sell and value‐in‐use. In assessing value‐in‐use, the estimated future cash flows are discounted to their present value using a pre‐tax discount rate that reflects current market conditions of the time value of money and the risks specific to the asset. Assets which cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets (cash‐generating units), except where the value in use of an asset can be estimated as being close to its fair value less costs to sell where fair value can be reliably determined.
J. PROPERTY AND EQUIPMENT
Owner occupied properties and all other assets classified as property and equipment are stated at historical cost less accumulated depreciation and accumulated impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Expenditures relating to ongoing maintenance of property and equipment are expensed as incurred in operating expenses in the consolidated statement of income. Land is not depreciated. Depreciation on other assets is calculated using the straight‐line method to allocate their cost to their residual values over their estimated useful lives at the following rates:
Computer hardware 3 years – 5 years Motor Vehicles 5 years Furniture and equipment 5 years – 10 years Leasehold improvements the shorter of the lease term or 5 years – 10 years Buildings 50 years
The assets’ residual values, useful lives and method of depreciation are reviewed at the end of each reporting period and adjusted if appropriate. Where the carrying amount of an asset is greater than its estimated recoverable amount, it is considered impaired and it is written down immediately to its recoverable amount. In the event of improvement in the estimated recoverable amount, the related impairment may be reversed. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount. These are included in commissions and other income in the consolidated statement of income.
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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K. INTANGIBLE ASSETS
Intangible assets include finite life assets. These assets include the following: Software development costs Costs associated with maintaining computer software programmes are recognised as an expense as incurred. Development costs that are directly attributable to the design and testing of identifiable software products controlled by the Group are recognised as internally generated intangible assets when:
it is technically feasible to complete the software product so that it will be available for use;
management intends to complete the software product and use it;
there is an ability to use the software product;
it can be demonstrated how the software product will generate probable future economic benefits;
adequate technical, financial and other resources to complete the development and to use the software product are available; and
the expenditure attributable to the software product during its development can be reliably measured. Directly attributable costs that are capitalised as part of the software development include employee costs and an appropriate portion of directly attributable overheads. Other development expenditures that do not meet these criteria are expensed when incurred. Capitalised software development costs for projects in use are amortised on a straight line basis over their useful lives, which range from 5 to 10 years.
L. INSURANCE CONTRACTS
The Group issues contracts that transfer insurance risk.
i) Insurance contracts
Insurance contracts are those contracts where the Group (the insurer) has accepted significant insurance risk from another party, the policyholder or ceding company, by agreeing to compensate the policyholders if a specified uncertain future event (the insured event) adversely affects the policyholders. As a general guideline, the Group determines whether it has significant insurance risk, by comparing benefits paid with benefits payable if the insured event did not occur. In addition, the Group considers the proportion of premiums received to the benefit payable if the insured event did occur. Insurance contracts can also transfer financial risk.
Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its lifetime, even if the insurance risk reduces significantly during this period, unless all rights and obligations are extinguished or expire. Short‐term insurance contracts include property, casualty, motor, marine, liability and other specialty insurance contracts. These contracts are all non‐participating contracts. Section a) – d) outlines the recognition and measurement of material financial line items related specifically to insurance contracts.
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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a) Deferred policy acquisition costs (“DAC”) related to insurance contracts For short term insurance contracts, commissions and other acquisition costs that vary with and are related to securing new contracts and renewing existing contracts are capitalised. All other costs are recognised as expenses when incurred. The DAC is subsequently amortised over the term of the policies on a straight line basis as premium is earned. For any policies written where there has been a total loss on sums insured, any deferred acquisition costs still recorded in the consolidated statement of financial position will be recognised in full in the consolidated statement of income. b) Reinsurance contracts held related to insurance contracts The Group uses reinsurance in the normal course of business to manage its risk exposure. Contracts entered into by the Group with reinsurers, under which the Group is compensated by the reinsurers for losses on one or more contracts issued by the Group and that meet the classification requirements for insurance contracts, are classified as reinsurance contracts held. Reinsurance assets are measured using the amounts and assumptions associated with the underlying insurance contracts and in accordance with the terms of each reinsurance contract. For any reinsurance coverage that are exhausted before the policy end date, any deferred balances still recorded in the consolidated statement of financial position will be recognised in full in the consolidated statement of income. To further mitigate underwriting risk, the Group purchases reinsurance to share part of the risks originally accepted by the Group in writing premiums. This reinsurance, however, does not relieve the Group of its primary obligation to policyholders. If any reinsurers are unable to meet their obligations under the related agreements, the Group remains liable to its policyholders for the unrecoverable amounts. The benefits to which the Group is entitled under its reinsurance contracts held are recognised as reinsurance assets. These assets consist of short‐term balances due from reinsurers, as well as longer term receivables that are dependent on the expected claims and benefits arising under the related reinsured insurance contracts. Reinsurance liabilities are primarily premiums payable for reinsurance contracts and are amortised consistent with the underlying insurance contracts. The Group assesses its reinsurance assets for impairment on an annual basis. If there is objective evidence that the reinsurance asset is impaired, the Group reduces the carrying amount of the reinsurance asset to its estimated recoverable amount and recognises that impairment loss in the consolidated statement of income. For any reinsurance coverage that are exhausted before the policy end date, any deferred balances still recorded in the consolidated statement of financial position will be recognised in full in the consolidated statement of income. c) Insurance contract liabilities Short‐term insurance contracts Claims and loss adjustment expenses are charged to insurance contract benefits and expenses in the consolidated statement of income as incurred based on the estimated ultimate liability for compensation owed to contract holders or third parties damaged by the contract holders. They include direct and indirect claims settlement costs and arise from events that have occurred up to the end of the reporting period even if they have not yet been reported to the Group. The Group does not discount its liabilities for unpaid claims.
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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A provision for short‐term insurance liabilities is made for the estimated costs of claims notified but not settled at the balance sheet date, using the best information available at that time. In addition to development on known claims, a provision is included for losses and loss adjustment expenses incurred but not reported on the basis of past experience. The provision is based on an actuarial analysis of the Group’s underwriting year or accident year development experience. The method of making such estimates and for establishing the resulting provisions is reviewed and updated annually and any adjustments resulting therefrom are reflected in earnings in the period in which they are determined. Expected reinsurance recoveries on claims, net of any required provision for doubtful amounts, are estimated using principles consistent with the Group’s method for establishing the related liability, and are in accordance with the terms of the Group’s reinsurance agreements. d) Liability adequacy test At the end of each reporting period, liability adequacy tests are performed on short‐term insurance contracts to ensure the adequacy of the contract liabilities net of related deferred policy acquisition costs (“DAC”). In performing these tests, current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from the assets backing such liabilities, are used. Any deficiency is immediately charged to the consolidated statement of income initially by writing off DAC and by subsequently establishing a provision for losses arising from liability adequacy tests (the unexpired risk provision). Any DAC written off as a result of this test cannot subsequently be reinstated. ii) Receivables and payables related to insurance contracts Receivables and payables are recognised when due. These include amounts due to and from agents, brokers and insurance and investment contract holders. These receivables and payables are included in insurance receivables and other assets, insurance contract liabilities and other liabilities in the consolidated statement of financial position. If there is objective evidence that the receivable is impaired, the Group reduces the carrying amount of the receivable accordingly and recognises that impairment loss in the consolidated statement of income. The Group gathers the objective evidence that a receivable is impaired using the same process adopted for loans and receivables in Note 2 J above. The impairment loss is calculated using the same method used for these financial assets.
M. CURRENT AND DEFERRED INCOME TAX
A portion of the Group’s business originates in countries where the Group is required to pay tax on income, profits, or capital gains. Accordingly, a provision for income taxes is made in these consolidated financial statements for that portion of the business subject to taxation. Under the asset and liability method of accounting for income taxes, deferred tax assets and liabilities are recognised for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax is recognised, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated statement of financial position. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. The tax effect of carry‐forwards of unused tax losses are recognised as an asset when it is probable that future taxable profits will be available against which these losses can be utilised. When management’s assessment indicates that it is more likely than not that deferred income tax assets will not be realised, a valuation allowance is recorded against the deferred tax assets.
N. EMPLOYEE BENEFITS
i) Pension obligations
A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. With respect to the Group’s defined contribution plans, the Group pays contributions into the plan and has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expenses when they are due.
ii) Share‐based compensation
BF&M has an Equity Incentive Plan under which subsidiaries of BF&M receive services from employees as consideration for equity instruments of BF&M (equity settled transactions). Share grants are issued to employees equal to the fair value of the shares on the grant date. The amount of the benefit of these share grants is amortised over the vesting period as operating expense in the consolidated statement of income. If BF&M grants share options to employees that vest in the future if service conditions are met, then the fair value of the options will be calculated at the date the options are granted. This fair value will be charged to the consolidated statement of income equally over the vesting period with adjustments made at each accounting date to reflect the best estimate of the number of options that will eventually vest. Where shares grants are forfeited due to failure by the employee to satisfy the service conditions, any expense previously recognized in relation to such shares are reversed effective the date of forfeiture. Expenses previously recognized related to share options are not reversed on forfeit. The grant by BF&M of its equity instruments to employees of its subsidiary undertakings is treated as a capital contribution by both BF&M and the subsidiaries. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase in additional paid in capital with a corresponding charge to operating expenses.
iii) Employee share purchase plan
BF&M operates an employee share purchase plan that allows its employees and those of its subsidiary undertakings to purchase BF&M’s common shares at below‐market rates, subject to certain restrictions. Shares are offered at a discount to the shares’ fair market value, as determined by the market share price on the date of purchase. Employees may purchase shares up to a maximum percentage of their gross salary. Consistent with the accounting treatment of the share‐based compensation, the discount is accounted for as a contribution to capital in the subsidiaries with a corresponding charge to operating expense in the period in which the shares are purchased.
O. REVENUE RECOGNITION
Revenue comprises the fair value for services. Revenue is recognised as follows:
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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i) Premium income
Premiums written are earned on a pro‐rata basis over the terms of the policies to which they are related. Unearned premiums represent the portion of premiums written that relate to the period of risk subsequent to the year‐end. Unearned premiums are included as a component of insurance contract liabilities in the consolidated statement of financial position. For any policies written where there has been a total loss on sums insured, any unearned premium still recorded in the consolidated statement of financial position will be recognised in full in the consolidated statement of income.
ii) Commission income
For short‐term reinsurance contracts, commission income is recognised over the term of the related reinsurance contracts and in accordance with the expensing of the related reinsurance premiums. The recognition of profit commissions is also dependent on the loss experience underlying such reinsurance policies. The Group earns commissions on reinsurance based on the agreement with the reinsurer. Commissions relating to reinsurance contracts are treated on a pro‐rata basis, and unearned portions at the financial period end are similarly carried forward on the consolidated statement of financial position.
P. LEASES
Leases that do not transfer substantially all the risks and rewards of ownership are classified as operating leases. Payments made under operating leases, where the Group is the lessee are included within operating expenses in the consolidated statement of income.
Q. DIVIDEND DISTRIBUTION
Dividend distribution to the Group’s shareholders’ is recognised as a liability in the consolidated statement of financial position in the period in which the dividends are approved by the Group’s Board of Directors. 3. NEW AND REVISED ACCOUNTING STANDARDS The Group has applied the following standards and amendments for the first time for its annual reporting period commencing 1 January 2017: i) Annual improvements to IFRS’s 2014‐2016 ii) Amendments to IAS 7 – Statement of Cash Flows iii) Amendments to IAS 12 – Income Taxes The adoption of these amendments did not have a significant impact on the current period or any prior period. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.
B. NEW AND REVISED ACCOUNTING STANDARDS TO BE ADOPTED IN 2018 OR LATER
The standards and interpretations that are issued, but not yet effective, are disclosed below. The Group intends to adopt these standards when they become effective. IFRS 15 – Revenue from Contracts with Customers (“IFRS 15”) – IFRS 15 was issued in May 2014 with amendments issued in April 2016. IFRS 15 establishes principles about the nature, timing and uncertainty of revenue arising from contracts with customers and requires entities to recognize revenue at an amount
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. IFRS 15 is effective for annual periods beginning on or after 1 January 2018 and is to be applied retrospectively, or on a modified retrospective basis. Insurance contracts, financial instruments and lease contracts are not in the scope of this standard. Adoption of IFRS 15 is not expected to have a significant impact on the Group’s Consolidated Financial Statements. IFRS 2 – Share based payments (“IFRS 2”) – The IASB issued amendments to IFRS 2 in June 2016 that address three main areas: the effects of vesting conditions on the measurement of a cash‐settled share‐based payment transaction; the classification of a share‐based payment transaction with net settlement features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share‐based payment transaction changes its classification from cash settled to equity settled. The amendments are to be applied prospectively with retroactive application permitted. The amendments are effective for annual periods beginning on or after 1 January 2018. Adoption of these amendments is not expected to have a significant impact to the Group. IFRIC 22 – Foreign Currency Transactions and Advance Consideration (“IFRIC 22”) ‐ IFRIC 22 was issued in December 2016 and is effective for annual periods beginning on or after 1 January 2018. IFRIC 22 addresses which foreign exchange rate to use to measure a foreign currency transaction when advance payments are made or received and non‐monetary assets or liabilities are recognized prior to recognition of the underlying transaction. The foreign exchange rate on the day of the advance payment is used to measure the foreign currency transaction.. Adoption of this standard is not expected to have a significant impact to the Group. IAS 40 – Investment Property (“IAS 40”) ‐ Amendments to this standard were issued in December 2016 and clarify that an entity shall transfer property to, or from, investment property when there is evidence of a change in use. The amendments are effective starting 1 January 2018. Adoption of these amendments will have no impact to the Group. IFRS 16 – Leases (“IFRS 16”) – In January 2016, the IASB issued this standard which introduces new guidance for identifying leases as well as a new right‐of‐use accounting model for lessees, replacing the operating and finance lease accounting models that currently exist. The new accounting model will generally require all lessees to recognise lease assets and liabilities on the balance sheet, initially measured at the present value of unavoidable lease payments for all leases with a maximum possible term of more than 12 months. In contrast to the significant changes for lessees, the new standard will retain many key aspects of the current lessor accounting model. The standard also requires more note disclosure for both lessees and lessors. The standard is effective 1 January 2019 to be applied retrospectively or on a modified retrospective basis. The Group is evaluating the impact of the adoption of this standard. IAS 28 – Investments in Associates and Joint Ventures (“IAS 28”) ‐ Amendments to this standard were issued in October 2017 and clarify that an entity applies IFRS 9 to financial interests in an associate or joint venture to which the equity method is not applied. The amendments are effective starting 1 January 2019 and are to be applied retrospectively or prospectively. Adoption of these amendments will have no impact to the Group. IFRIC 23 – Uncertainty Over Income Tax Treatments (“IFRIC 23”) – IFRIC 23 was issued in June 2017 and is effective for annual periods beginning on or after 1 January 2019, to be applied retrospectively. IFRIC 23 clarifies how to apply the recognition and measurement requirements of IAS 12 Income Taxes when there is uncertainty over income tax treatments and requires an entity to determine whether tax treatments should
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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be considered collectively or independently depending on which approach better predicts resolution of the uncertainty. Adoption of this interpretation is not expected to have a significant impact to the Group. Annual Improvements 2015 – 2017 Cycle – These annual improvements were issued in December 2017 and are effective for years beginning on or after 1 January 2019. There are three minor amendments to standards with prospective application required. Adoption of these improvements are not expected to have a significant impact to the Group.
IFRS 9 ‐ Financial Instruments (“IFRS 9”) – In July 2014, the IASB issued the final version of this standard that replaces IAS 39 Financial Instruments: Recognition and Measurement and all previous versions of IFRS 9. The standard is effective for years beginning on or after 1 January 2018 and is to be applied either retrospectively or on a modified retrospective basis. The IASB issued amendments in October 2017 that are effective for annual periods beginning on or after 1 January 2019. IFRS 9 brings together all three aspects of the accounting for financial instruments project undertaken by the IASB: classification and measurement, impairment and hedge accounting. Financial asset classification is based on the cash flow characteristics and the business model in which an asset is held. The classification determines how a financial instrument is accounted for and measured. IFRS 9 also introduces an impairment model for financial instruments not measured at fair value through profit or loss that requires recognition of expected losses at initial recognition of a financial instrument and the recognition of full lifetime expected losses if certain criteria are met. In addition, a new model for hedge accounting was introduced to achieve better alignment with risk management activities.
In October 2017, the IASB published a narrow‐scope amendment to IFRS 9, allowing companies to measure particular pre‐payable financial assets with so‐called ‘negative compensation’ at amortised cost or at fair value through other comprehensive income if a specified condition is met—instead of at fair value through profit or loss. The IASB also confirmed the accounting for modifications of financial liabilities. That is, when a financial liability measured at amortised cost is modified without this resulting in derecognition, a gain or loss should be recognised in profit or loss. The gain or loss is calculated as the difference between the original contractual cash flows and the modified cash flows discounted at the original effective interest rate.
The Group and BF&M intends to defer IFRS 9 until 1 January 2021 as allowed under the amendments to IFRS 4 – Insurance Contracts outlined below. The Group is assessing the impact of this standard and will continue to apply IAS 39, the existing financial instrument standard until 2021. IFRS 4 – Insurance Contracts (“IFRS 4”) – Amendments to IFRS 4 were issued in September 2016 and are effective for annual periods beginning on or after 1 January 2018. The amendments introduce two approaches to address concerns about the differing effective dates of IFRS 9 and IFRS 17 – Insurance Contracts. The ‘Overlay Approach’ provides an option for all issuers of insurance contracts to adjust profit or loss for eligible financial assets by removing any additional accounting volatility that may arise from applying IFRS 9 before IFRS 17 is implemented. The ‘Deferral Approach’ provides companies whose activities are predominantly related to insurance an option temporary exemption from applying IFRS 9 until 1 January 2021. The Group qualifies for the exemption and intends to deter IFRS 9 until 1 January 2021. a l IFRS 17 – Insurance Contracts (“IFRS 17”) – This new standard was issued in May 2017 and supersedes IFRS 4 and related interpretations and is effective for periods beginning on or after 1 January 2021. Whereas IFRS 4 allows insurance entities to use their local Generally Accepted Accounting Principles when accounting
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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for insurance contracts, IFRS 17 defines rules with the aim to increase the comparability of financial statements. The standard requires insurance liabilities to be measured at a current fulfillment value and provides a more uniform measurement and presentation approach for all insurance contracts. The Group is assessing the impact of this standard and expects that it will have a significant impact on the Group’s Consolidated Financial Statements. beginning on or after 1 January 2021.
There are no other new or amended IFRS’s or IFRIC interpretations that are not yet effective that would be applicable and expected to have a material impact on the Group.
4. MANAGEMENT OF FINANCIAL AND INSURANCE RISK
Risk management and objectives
The Group’s primary objective in undertaking risk management activity is to manage risk exposures in line with risk appetite, minimising its exposure to unexpected financial loss and limiting the potential for deviation from anticipated outcomes. In this respect, a framework of limits and qualitative statements, aligned with the Group’s risk appetite, is in place for material exposures. Key management recognises the critical importance of having efficient and effective risk management systems in place.
A significant part of the Group’s business involves the acceptance and management of risk. The Group is exposed to insurance, market, credit, liquidity and operational risks and operates a formal risk management framework to ensure that all significant risks are identified and managed.
The Group seeks to manage its exposures to risk through control techniques which ensure that the residual risk exposures are within acceptable tolerances agreed by the Board of Directors. The Group has established a risk management function with terms of reference from the Board of Directors, its committees and the associated executive management committees. This is supplemented with an organisational structure with documented delegated authorities and responsibilities from the Board of Directors to executive management committees and senior managers. The key control techniques for the major categories of risk exposure are summarised in the following sections.
Risks are usually grouped by risk type: financial, including credit, liquidity, market, and insurance, including short term insurance risk. Risks falling within these types may affect a number of key metrics including those relating to balance sheet strength, liquidity and profit. The risk factors mentioned below should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties.
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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A. FINANCIAL RISK
i) Credit risk
Credit risk is the exposure that a counter‐party to a financial instrument is unable to meet an obligation, thereby causing a financial loss to the Group. The Group faces credit risk on its financial assets. The following policies and procedures are in place to manage this risk:
Holding a diversified investment portfolio that focuses on quality of investment. The portfolio is monitored and reviewed regularly by management’s Investment Committee and by the Board of Director’s, Audit, Compensation, and Corporate Governance Committee;
Investment guidelines are in place that require the purchase of only investment‐grade assets and minimise undue concentration of assets in any single insurer, industry group, asset class or credit rating, unless required by local law or regulation;
The credit risk for premiums receivable is mitigated as a customer’s policy may be cancelled if the customer is in default of a payment. Credit risk also arises from balances due from brokers and agents. Management regularly reviews the Group’s business relationships with agents and brokers, whom are also subject to visits from the Group’s underwriting department.
Transacting business with well‐established reinsurance companies with strong credit ratings.
Maximum exposure to credit risk The following table summarises the Group’s maximum exposure to credit risk related to financial instruments. The maximum credit exposure is the carrying value of the asset net of any allowances for losses.
2017
$2016
$
Financial assets
Cash and cash equivalents 121,079 31,439
Fixed deposits 2,020 2,000
Regulatory assets 13,604 5,762
Accounts receivable 14,852 16,065
Fixed income securities 14,551 14,093
Ceding commission receivable 3,199 2,862
Other receivables (excluding prepayments) 1,729 1,091
VAT advanced and refund recoverable 1,669 2,180
Tax receivable 1,341 477
Reinsurance receivables 513 486
Insurance assets
Reinsurance balances recoverable 544,626 33,300
TOTAL assets subject to credit risk 719,183 109,755
Concentration of credit risk Concentrations of credit risk arise from exposures to a single debtor, a group of related debtors or groups of debtors that have similar credit risk characteristics in that they operate in the same geographic region or in similar industries.
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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The following table provides details of the carrying value of fixed income securities held disclosed as Investments and Regulatory assets by industry sector and geographic distribution:
2017
$ 2016
$
Fixed income securities issued or guaranteed by: Government 5,871 3,158Financials 5,598 2,065U.S. Treasury and other agencies 5,731 4,324Utilities and energy 1,592 1,987Consumer staples and discretionary 1,413 1,039Telecom ‐ ‐Computer technology products and services 1,126 525Industrials ‐ 995Other 533 ‐
TOTAL Fixed income securities 21,864 14,093
United States 10,772 7,447 Caribbean excluding Barbados 4,661 ‐ Northern Europe 3,260 2,470 Asia‐Pacific 2,638 2,614 Other 533 1,051 Canada ‐ 511
TOTAL Fixed income securities 21,864 14,093
Credit quality of financial assets The credit quality of financial assets are assessed quarterly by reference to S&P credit ratings if available or review of historical and current conditions that existed at the balance sheet date. The following tables summarises the carrying value of financial assets by external credit rating. As at 31 December 2017
AAA AA A BBB BB and
lower Not rated Total
$ $ $ $ $ $ $
Cash and cash equivalents ‐ 10,270 16,821 93,983 ‐ 5 121,079 Fixed deposits ‐ ‐ ‐ 2,020 ‐ ‐ 2,020 Regulatory assets 1,120 312 3,188 ‐ 4,450 4,534 13,604 Fixed income securities 2,611 9,022 2,918 ‐ ‐ ‐ 14,551
Total 3,731 19,604 22,927 96,003 4,450 4,539 151,254
As at 31 December 2016
AAA AA A BBB BB and
lower Not rated Total
$ $ $ $ $ $ $
Cash and cash equivalents ‐ 16,834 8,448 5,421 ‐ 736 31,439 Fixed deposits ‐ ‐ ‐ 2,000 ‐ ‐ 2,000 Regulatory assets ‐ ‐ 1,667 1,037 662 2,396 5,762 Fixed income securities 3,121 8,248 2,724 ‐ ‐ ‐ 14,093
Total 3,121 25,082 12,839 8,458 662 3,132 53,294
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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The Group’s reinsurance panel consists out of 56 reinsurance companies. The AM Best credit rating of the reinsurance companies range from A++ to A‐, with one reinsurance company not rated.
ii) Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations as they become due. The following policies and procedures are in place to manage this risk:
Management maintains levels of cash and short‐term deposits, which are sufficient to fulfill the Group’s short‐term obligations;
The ability of the Group’s subsidiaries in certain jurisdictions to pay dividends and transfer funds is regulated. The Group maintains appropriate dividend and capital policies to ensure movement of cash flow through the Group as needed;
Arrangements with reinsurers are made to ensure that recoverables are received in a timely fashion in the event of a liquidity crisis.
The Group’s credit risk exposure to any one individual policyholder on direct business is not material. As of December 31, 2017, accounts receivables of $1,200 (2016: $1,395) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default. Receivables past due but not impaired are shown in the tables below. All other receivables recognised in the consolidated statements of financial position are deemed to be neither past due nor impaired.
Accounts Receivable 3 to 6 months > 6 months Total
$ $ $
As at December 31, 2017 801 399 1,200 As at December 31, 2016 990 405 1,395
The maturity profile of financial assets at 31 December 2017 is as follows:
Within 1 year
2 to 3years
4 to 5years
Over 5 years
Total Effective
$ $ $ $ $ interest rate
ranges Fixed income securities - Investments 351 1,491 4,202 8,507 14,551 0.21% - 4.10%Fixed income securities – Regulatory assets - 337 1,088 5,888 7,313 2.05% - 6.95%Insurance receivables and other assets 78,509 - - - 78,509 0%
Reinsurance assets 578,459 - - - 578,459 0%
Total 657,319 1,828 5,290 14,395 678,832
Percent of total 96.8% 0.3% 0.8% 2.1% 100.0%
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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The maturity profile of financial assets at 31 December 2016 was as follows:
Within 1 year
2 to 3years
4 to 5years
Over 5 years
Total Effective
$ $ $ $ $ interest rate
ranges Fixed income securities 701 2,524 10,868 14,093 0.49% - 4.75%Insurance receivables and other assets 35,019 - - - 35,019 0%
Reinsurance assets 59,753 - - - 59,753 0%
Total 94,772 701 2,524 10,868 108,865
Percent of total 87.1% 0.6% 2.3% 10.0% 100.0%
The maturity profiles of the Group’s significant insurance and financial liabilities are summarised in the following tables. Maturity profiles for financial liabilities are disclosed according to contractual maturity dates. Maturity profiles for net insurance liabilities are based on expectations. The timing of undiscounted cash flows arising from the Company’s financial liabilities totaling $185,885 (2016: $40,080) are all within one year. The Company’s financial liabilities include the reinsurance balance payable, accounts payable, commission payable, profit commission payable, premium taxes payable, net insurance contract liabilities, income tax payable, and due to related parties. The maturity profile of liabilities at 31 December 2017 is as follows:
Within 1 year 1-5 years Over 5 years Total
$ $ $ $
Other liabilities 175,833 - - 175,833 Insurance contract liabilities – net of reinsurance 16,483 - - 16,483
TOTAL 192,316 - - 192,316
The maturity profile of liabilities at 31 December 2016 was as follows:
Within 1 year 1-5 years Over 5 years Total
$ $ $ $
Other liabilities 26,648 - - 26,648 Insurance contract liabilities – net of reinsurance 21,159 - - 21,159
TOTAL 47,807 - - 47,807
iii) Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate as a result of changes in market factors. Market risk comprises three types of risk: foreign exchange rates (currency risk), market interest rates (interest rate risk), and market prices (price risk).
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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Currency risk Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group is not significantly exposed to foreign exchange risk because substantially all currencies with which the Group has material assets and liabilities are either in U.S. Dollars or are pegged to the U.S. Dollar which is the Group’s functional and presentation currency. Interest rate risk Interest rate risk is price volatility produced by changes in the overall level of interest rates. Change in market interest rates can impact the reinvestment of matured investments, as the returns available on the new investment may be significantly different from the returns previously achieved. The Group manages these risks through:
Asset allocation and diversification of the investment portfolio;
Investing in assets that are suitable for the products sold; and
Quantifying and reviewing regularly the risk associated with the mismatch in portfolio duration and cash flow.
Price risk Price risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from interest rate risk or currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting the market.
The Group’s price risk exposure relates to financial assets and financial liabilities whose values will fluctuate as a result of changes in market prices, principally investment securities.
The Group’s price risk policy requires it to manage such risks by setting and monitoring objectives and constraints on investments, diversification plans, limits on investments in each country, sector and market.
A 5% increase/decrease in the value of the Group’s equity portfolio would increase/decrease the Group’s comprehensive income by $346 (2016 $315) and the Group’s other components of equity by $nil (2016 ‐ $nil). The price risk sensitivity impact was calculated by using the ending balances in equity at a 5% increase/decrease.
iv) Market risk
The sensitivity analysis below is based on a change in one assumption while holding all other assumptions constant. In practice, this is unlikely to occur, as changes in some of assumptions may be correlated.
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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Sensitivity factor Description of sensitivity factor applied Interest rate‐ cash & cash equivalents: The impact of a change in market interest rates by 1% (2016: 1%) Interest rate fixed income securities: The impact of a change in market interest rates by 1% (2016: 1%) Underwriting income: The impact of a change in insurance rates by 5% (2016: 5%) Underwriting expenses: The impact of a change in acquisition costs by 5% (2016: 5%) Loss ratios: The impact of a change in accrued losses by 25% (2016: 25%)
December 31, 2017 Interest
rates Underwriting
rates Loss ratios
$ ‘000 $ ‘000 $ ‘000
Impact on net profit from increase in sensitivity factor* (744) 435 (2,124) Impact on net profit from decrease in sensitivity factor* 688 (435) 2,124 The portion that is recognised directly in shareholder’s equity is Nil
December 31, 2016 Interest
rates Underwriting
rates Loss ratios
$ ‘000 $ ‘000 $ ‘000
Impact on net profit from increase in sensitivity factor* (704) 1,229 (1,448) Impact on net profit from decrease in sensitivity factor* 676 (1,229) 1,448 The portion that is recognised directly in shareholder’s equity is Nil
* Net of reinsurance The duration of liabilities is calculated based on management’s experience from prior year’s average settlement pattern for outstanding claims. The durations are:
2017 2016
Net insurance liability‐ property risk 1‐2 months 1‐2 months
Net insurance liability‐ motor risks 1 month 1 month
Net insurance liability‐ casualty risks 12 months 12 months
B. INSURANCE RISK
Types of risk
i) General insurance risk
The risk under any one insurance contract is the possibility that the insured event occurs and the uncertainty of the amount of the resulting claim. Insurance risk is implicit in the Group’s insurance business and arises as a consequence of the type and volume of business written and the concentration of risk in particular policies or groups of policies subject to the same risks.
General insurance risk in the Group arises from:
Fluctuations in the timing, frequency and severity of claims and claim settlements relative to expectations;
Unexpected claims arising from a single source;
Inaccurate pricing of risks or inappropriate underwriting of risks when underwritten
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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Inadequate reinsurance protection or other risk transfer techniques; and
Inadequate reserves. The majority of the general insurance business underwritten by the Group is of a short term nature such as property, motor and marine insurances. The Group’s underwriting strategy and appetite is agreed by the Board of Directors and communicated via specific policy statements and guidelines. Management of general insurance risks The Group’s insurance risk policy sets out the overall framework for the management of insurance risk. As part of the framework, a structure of delegated pricing and underwriting authorities is in place. Pricing is based on assumptions which consider past experience and trends. Insurance exposures are limited through reinsurance. Overall, the Group seeks to be conservative in its acceptance of insurance risks by establishing strict underwriting criteria and limits. The underwriting policy is clearly documented, setting out risks which are unacceptable and the terms applicable for non‐standard risks.
Significant insurance risks will be reported through the risk management framework. The estimated cost of claims includes direct expenses to be incurred in settling claims, net of the expected subrogation value and other recoveries. The Group takes all reasonable steps to ensure that it has appropriate information regarding its claims exposures. However, given the uncertainty in establishing claims provisions, it is likely that the final outcome will prove to be different from the original liability established. The liability for these contracts comprise a provision for claims incurred but not yet reported (“IBNR”), a provision for reported claims not yet paid and a provision for unexpired risks at the end of the reporting period.
Management under the direction of the Board of Directors monitors and develops the management of insurance risk in the general insurance business units, and assesses the aggregate risk exposure. It is responsible for the development, implementation and review of the Group policies for underwriting, claims, reinsurance and reserving that operate within the risk management framework.
BF&M General and IHIC have developed mechanisms that identify, quantify and manage accumulated exposures to contain them within the limits of the appetite of the Group. Where appropriate such mechanisms are employed throughout the business units to promote the adoption of best practice as standard.
Reinsurance strategy Reinsurance is used to reduce potential loss to the Group from individual large risks and catastrophic events. It may also be used to manage accumulated exposures, capital or to provide access to specialist underwriting expertise. In the case of default by a reinsurer, this does not release the Group from its liability to the insured policyholders.
Significant reinsurance programmes are reviewed annually to verify that the levels of protection being purchased reflect any developments in exposure and the risk appetite of the Group. These reinsurance arrangements include quota share, facultative, per risk and catastrophe excess of loss programmes. The reinsurance is placed with providers who meet the Group’s counter‐party security requirements, and large reinsurance placements may also require approval from the Board of Directors.
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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Quota Share and Facultative reinsurance contracts are entered into by the Group directly on a stand‐alone basis as well as part of a general reinsurance pool, for catastrophe excess of loss coverage, with two other BF&M Limited affiliated entities (the “Reinsurance Pooling Arrangement”).
The Reinsurance Pooling Arrangement is an arrangement entered into to collectively participate in shared reinsurance coverage, including shared limits on each of the catastrophe excess of loss reinsurance contracts. The total reinsurance costs are determined in accordance with the contracts based on the exposure data, aggregate limits and gross net earned premium income of the collective three entities in the Reinsurance Pooling Arrangement. The allocation of the reinsurance cost of the Reinsurance Pooling Arrangement is initially performed by an independent reinsurance broker based on the estimated exposures attributable to each entity within the Reinsurance Pooling Arrangement. Premium adjustments are determined by the Group to reflect revised projections of insured aggregate exposures in each individual territory i.e. a change in estimate. This component of the reinsurance cost does not represent an arm’s length transaction.
The Company utilized the Reinsurance Pooling Arrangement in the current year due to Hurricanes Irma and Maria. The Company incurred further costs to replenish the Reinsurance Pooling Arrangement back to its original levels.
Recoveries from any claims under Reinsurance Pooling Arrangement are allocated to the participant who actually incurred the claims. The policy aggregate limits of the Reinsurance Pooling Arrangement are shared, with each entity able to recover claims, individually or in combination, up until the point where the aggregate limit for the entire Reinsurance Pooling Arrangement is exhausted. There is no cap on the amount of recoveries an individual entity is permitted to claim under the Reinsurance Pooling Arrangement, however, once the aggregate limited is exhausted, no further recoveries are possible for any entity. Accordingly, the risk exists that any one entity’s catastrophe loss experience will reduce the coverage available to the other territories and could potentially exhaust the catastrophe coverage for the entire Reinsurance Pooling Arrangement.
Reinsurance purchases are in line with the strategy set out in the Group’s Reinsurance policy. The basis of these purchases is underpinned by extensive financial and capital modeling and actuarial analysis to optimise the cost and capital efficiency benefits from the reinsurance programme.
The reinsurance is placed with providers who meet the Group’s counterparty security requirements, and large reinsurance placements may also require approval from the Board of Directors. Concentration risk Processes are in place to manage catastrophe risk at a Company level. The Group cedes much of its catastrophe risk to third‐party reinsurers but retains a pooled element for its own account gaining a diversification benefit.
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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The value of insured exposures at December 31, 2017 and 2016, gross and net of reinsurance (excluding catastrophe programme coverage) by geographical location and line of business are summarised below:
31 December 2017
Territory
Property $
Motor $
All Other $
Total $
Bahamas Gross 3,796,548 45,355 - 3,841,903 Net 1,239,731 45,355 - 1,285,086
Cayman Gross 2,844,126 46,795 - 2,890,921 Net 938,378 46,795 - 985,173 USVI Gross 1,241,649 10,141 - 1,251,790 Net 584,296 10,141 - 594,437 Other Gross 1,925,829 - - 1,925,829 Net 478,575 - - 478,575 Total
Gross 9,808,152 102,291 - 9,910,443Net 3,240,980 102,291 - 3,343,271
31 December 2016
Territory
Property $
Motor $
All Other $
Total $
Bahamas Gross 3,200,586 38,338 - 3,238,924 Net 1,430,088 38,338 - 1,468,427
Cayman Gross 2,615,329 39,421 - 2,654,750 Net 1,078,749 39,421 - 1,118,170 USVI Gross 1,119,162 11,419 - 1,130,581 Net 689,246 11,419 - 700,665 Other Gross 1,846,109 - - 1,846,109 Net 715,758 - - 715,759 Total
Gross 8,781,186 89,178 - 8,870,364Net 3,913,841 89,178 - 4,003,020
Processes are in place to manage catastrophe risk in individual business units and at a Group level. The Group cedes much of its catastrophe risk to third‐party reinsurers but retains a pooled element for its own account gaining diversification benefit.
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
- 31 -
The concentration of insurance risk before and after reinsurance by territory in relation to the type of general insurance business risk accepted is summarised below, with reference to the carrying amount of the insurance reserve liabilities (gross and net of reinsurance excluding catastrophe programme coverage) arising from general insurance contracts:
31 December 2017
Territory
Property $
Motor $
All Other $
Total $
Cayman/Other Caribbean Gross 544,079 3,871 3,240 551,190 Net 1,254 3,450 1,861 6,565 31 December 2016
Territory
Property $
Motor $
All Other $
Total $
Cayman/Other Caribbean Gross 31,856 3,390 3,096 38,342 Net 869 2,508 1,665 5,042
General insurance business claims reserving Assumptions and methodology Claims are payable on an occurrence basis. The Group is liable for all insured events that occurred during the term of the contract, even if the loss is discovered after the end of the contract term.
Property risks are comprised principally of physical damage to property, contractors all risk and auto physical damage. Property policies are underwritten by reference to the replacement value of the properties and contents insured.
Claim payment limits are always included to cap the amount payable on occurrence of the insured event. The costs of rebuilding properties, of replacement or indemnity for contents are the key factors that influence the level of claims under these policies. The greatest likelihood of significant losses on these contracts arises from windstorm or sea inundation damage. For property insurance contracts, climatic changes give rise to more frequent and severe extreme weather events, such as hurricanes, which may result in motor and property claims.
Casualty risks are principally comprised of personal injury from motor claims. The Group manages these risks by way of a conservative underwriting strategy, adequate reinsurance arrangements and proactive claims management. Underwriting limits are in place to enforce appropriate risk selection criteria. For example the Group has the right not to renew individual policies and it has the right to reject the payment of a fraudulent claim.
Management monitors and conducts quarterly reviews of the Group’s general insurance claims provisions, and their adequacy.
The Group has a claims department dealing with the mitigation of risks surrounding known exposures. This department investigates and adjusts claims with the assistance and advice of external loss adjusters. The claims are reviewed individually on an on‐going basis and adjusted to reflect the latest information on the underlying facts, current law, jurisdiction, contractual terms and conditions, and other factors. The Group
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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actively manages and pursues early settlements of claims to reduce its exposure to unpredictable developments. The adequacy of the Group’s insurance claims provisions is ultimately overseen by the Board of Directors.
The ultimate cost of outstanding contract liabilities are estimated by using a range of standard actuarial claims projections techniques, such as the Incurred Development Methodology and the Bornhuetter‐Ferguson methods. The main assumption underlying these techniques is that the Group’s past claims development experience can be used to project future claims development and hence ultimate claim costs. Historical claims development is analysed by either accident period or underwriting period. Claims development is analysed for each geographical area as well as by line of business.
The subsidiaries writing general insurance business have a documented reserving policy setting out the basis on which liabilities are to be determined using statistical analysis and actuarial experience. Policies for each subsidiary are in line with relevant local regulation and legislation.
Management monitors and conducts quarterly reviews of the Group’s general insurance claims provisions, and their adequacy.
The Group has claims departments dealing with the mitigation of risks surrounding known exposures. These departments investigate and adjust a majority of the claims. The claims are reviewed individually on a quarterly basis and adjusted to reflect the latest information on the underlying facts, current law, jurisdiction, contractual terms and conditions, and other factors. The Group actively manages and pursues early settlements of claims to reduce its exposure to unpredictable developments.
The adequacy of the Group’s general insurance claims provisions is ultimately overseen by the Board of Directors.
The estimate of the ultimate liability arising from short term insurance contracts is a significant accounting estimate. These liabilities are divided into 2 categories: the provision for IBNR and the provision for the cost of reported claims not yet paid. Provisions are also made for adverse development and unallocated loss adjustment expenses.
The estimation of the IBNR claims is generally subject to a greater degree of uncertainty than the estimation of the cost of settling claims already notified to the Group, where information about the claim event is available. IBNR claims may not be apparent to the insured until many years after the event that gave rise to the claims. For casualty contracts, the IBNR liability will typically display greater variations between initial estimates and final outcomes because of the greater degree of difficulty of estimating these liabilities.
In estimating the liability for the cost of reported claims not yet paid, the Group considers any information available from loss adjusters and information on the cost of settling claims with similar characteristics in previous periods. Large claims are assessed on a case‐by‐case basis in order to allow for the possible distortive effect of their development and incidence on the rest of the portfolio. Any estimate of future costs is subject to the inherent uncertainties in predicting the course of future events. Assumptions are made around costs such as repairs, jury decisions, court interpretations and legislative changes. Consequently, the amounts recorded in respect of unpaid claims may change significantly in the short term. Management engages independent actuaries to assist them in making such estimates based on the Group’s own loss history and relevant industry data.
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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Claims development tables The development of insurance liabilities provides a measure of the Group’s ability to estimate the ultimate value of claims. The top half of each table illustrates how the Group’s estimate of total claims outstanding for each accident or underwriting year has changed at successive year‐ends. The bottom half of the table reconciles the cumulative claims to the amount appearing in the consolidated statement of financial position. A calendar year basis is considered to be most appropriate for the business written by the Group. Cayman Islands / Other Caribbean Gross loss development Underwriting year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total Estimate of ultimate claims cost: $ $ $ $ $ $ $ $ $ $ At the end of accident year* 21,668 4,263 5,222 14,767 9,613 8,524 8,466 9,530 61,642 647,217 - One year later 20,106 3,701 4,775 12,735 8,592 8,243 8,021 8,741 60,485 - - Two years later 19,765 3,645 5,078 13,028 8,618 7,502 7,840 8,171 - - - Three years later 19,768 3,670 5,101 13,314 8,515 7,766 7,794 - - - - Four years later 19,610 3,671 5,062 13,290 8,449 7,663 - - - - - Five years later 19,596 3,669 5,065 13,287 8,464 - - - - - - Six years later 19,587 3,665 5,075 13,293 - - - - - - - Seven years later 19,589 3,662 5,037 - - - - - - - - Eight years later 19,594 3,700 - - - - - - - - - Nine years later 19,594 - - - - - - - - - - Current estimates of cumulative claims 19,594 3,700 5,037 13,293 8,464 7,663 7,794 8,171 60,485 647,217 784,380 Cumulative payments to date (19,529) (3,662) (5,037) (13,117) (8,313) (7,329) (7,283) (7,550) (52,020) (106,388) (233,190) Gross Liability recognised in the consolidated statement of financial position
65 38 - 176 151 334 511
621
8,465
540,829 551,190
Reserve in respect of prior years - - - - - - - - - - - TOTAL reserve included in the consolidated statement of financial position
65 38 - 176 151 334 511
621
8,465
540,829 551,190
Net loss development: Underwriting year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Total Estimate of ultimate claims cost: $ $ $ $ $ $ $ $ $ $ At the end of accident year* 3,364 1,592 1,466 2,452 2,994 4,703 3,950 5,914 11,263 9,919 - One year later 3,251 1,353 1,256 2,285 2,269 4,631 4,261 5,316 10,230 - - Two years later 3,227 1,371 1,302 2,363 2,238 4,239 4,132 4,945 - - - Three years later 3,237 1,031 1,314 2,395 2,219 4,248 4,118 - - - - Four years later 3,156 1,029 1,305 2,375 2,200 4,240 - - - - - Five years later 3,144 1,027 1,313 2,376 2,195 - - - - - - Six years later 3,136 1,023 1,323 2,392 - - - - - - - Seven years later 3,134 1,021 1,283 - - - - - - - - Eight years later 3,139 1,059 - - - - - - - - - Nine years later 3,139 - - - - - - - - - -
Current estimates of cumulative claims
3,139
1,059
1,283
2,392
2,195
4,240
4,118
4,945
10,230
9,919
43,521 Cumulative payments to date (3,078) (1,021) (1,283) (2,368) (2,177) (4,175) (4,004) (4,617) (8,913) (5,319) (36,955) Net Liability recognised in the consolidated statement of financial position
61 38 - 24 18 65 114 328
1,317
4,600 6,565
Reserve in respect of prior years - - - - - - - - - - - TOTAL reserve included in the consolidated statement of financial position
61 38 - 24 18 65 114
329
1,317
4,600 6,565
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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Total reserves included in the consolidated statement of financial position: Total
$
Gross Cayman Islands / other Caribbean 551,190 TOTAL * 551,190 Net Cayman Islands / other Caribbean 6,565 TOTAL * 6,565 *Does not include unearned premium or claims payable.
C. CAPITAL MANAGEMENT AND REGULATORY COMPLIANCE
The Cayman Islands Monetary Authority (“CIMA”) has statutory powers that enable it to use its discretion to require the Group to conduct its Cayman operations in accordance with general or specific conditions which may be imposed by CIMA or may be agreed between CIMA and the Group. The Group is required to maintain capital in excess of the greater of approximately $300 for domestic insurers or $1,000 for external insurers, and an amount determined as per a prescribed formula set out in legislation. The formula prescribes the minimum capital requirements for the Group’s assets and liabilities on a risk basis and also provides for a margin of catastrophe. The Group holds both a domestic insurer license and an external insurer Class A license. Additionally, IHIC has regulated insurance operations in several other jurisdictions. Additionally, the group has regulated insurance operations in several other jurisdictions (see note 1). At December 31, 2017 the Group was in compliance with its regulatory requirements as an external insurer.
5. FAIR VALUE MEASUREMENTS
A. FAIR VALUE METHODOLOGIES AND ASSUMPTIONS
Management has assessed that the carrying values of cash and cash equivalents, fixed deposits and regulatory assets approximate their fair values. The fair value of fixed income securities which are carried at FVTPL is determined using quoted prices in active markets for identical or similar securities. When quoted prices in active markets are not available, fair value is determined using market standard valuation methodologies, which include discounted cash flow analysis, consensus pricing from various broker dealers that are typically the market makers, or other similar techniques. The assumptions and valuation inputs in applying these market standard valuation methodologies are determined primarily using observable market inputs, which include, but are not limited to, benchmark yields, reported trades of identical or similar instruments, broker‐dealer quotes, issuer spreads, bid prices, and reference data including market research publications. In limited circumstances, non‐binding broker quotes are used. The fair value of equity securities is determined using quoted prices in active markets for identical securities or similar securities. When quoted prices in active markets are not available, fair value is determined using equity valuation models, which include discounted cash flow analysis and other techniques that involve benchmark comparison. Valuation inputs primarily include projected future operating cash flows and earnings, dividends, market discount rates, and earnings multiples of comparable companies.
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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B. FAIR VALUE HIERARCHY
The Group categorises its fair value measurements according to a three‐level hierarchy. The hierarchy prioritises the inputs used by the Groups valuation techniques. A level is assigned to each fair value measurement based on the lowest level input significant to fair value measurement in its entirety.
The three levels of the fair value hierarchy are defined as follows:
i) Level 1
Fair value is based on quoted market prices for identical assets and liabilities in an active market at the balance sheet date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing services, or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market price used for financial assets held by the Group is the current bid price.
ii) Level 2
Fair value inputs for level 2 are inputs, other than quoted prices included within level 1, that are observable for the asset or liability either directly or indirectly. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. These inputs include the following:
Quoted prices for similar assets and liabilities in an active market
Quoted prices for identical or similar assets in a market that is not active, the prices are not current, or price quotations vary substantially over time or for which little information is released publically.
Inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves.
iii) Level 3
If one or more of the significant inputs is not based on observable market data, the financial assets are included in level 3. Where estimates are used, these are based on a combination of independent third party evidence and internally developed models using market observable data where possible. A transfer from level 2 to level 3 would occur primarily due to decreased observability of inputs in valuation methodology. Conversely, transfers out of level 3 would primarily occur due to increased observability of inputs.
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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C. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE
The following table presents the Group’s assets and liabilities measured at fair value in the consolidated statement of financial position, categorised by level under the fair value hierarchy:
Level 1 Level 2 Level 3 Total
31 December 2017 $ $ $ $
Assets
Cash and cash equivalents 121,079 - - 121,079
Fixed deposits 2,020 - - 2,020
Regulatory assets
Fixed income securities 7,313 - 7,313
Cash 6,291 - - 6,291
Financial assets at FVTPL
Fixed income securities 5,060 9,491 - 14,551
Equities 6,913 - - 6,913
TOTAL assets 141,363 16,804 - 158,167
Level 1 Level 2 Level 3 Total
31 December 2016 $ $ $ $
Assets
Cash and cash equivalents 31,439 - - 31,439
Fixed deposits 2,000 - - 2,000
Regulatory assets
Fixed income securities - - - -
Cash 5,762 - - 5,762
Financial assets at FVTPL
Fixed income securities 3,741 10,352 - 14,093
Equities 6,296 - - 6,296
TOTAL assets 49,238 10,352 - 59,590
During the current and prior year there were no transfers between Levels 1 and 2 and no assets or liabilities measured at fair value in Level 3 (2016: None).
6. CASH AND CASH EQUIVALENTS
2017 $
2016 $
Cash at bank and in hand 119,526 29,928
Short‐term deposits 1,553 1,511
TOTAL 121,079 31,439
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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7. REGULATORY ASSETS AND FIXED DEPOSITS
2017 $
2016$
Regulatory assets 13,604 5,762
- Fixed income securities 7,313 ‐
- Cash 6,291 5,762
Fixed deposits 2,020 2,000
TOTAL 15,624 7,762
Regulatory assets represent fixed income securities and amounts placed on deposit with banks and government bodies to satisfy licensing criteria in certain jurisdictions in which the Group operates. These assets cannot be removed nor the accounts reduced without the prior written consent of the relevant regulator. The fixed deposits have terms of 365 days with various independent financial institutions. The fixed deposit will mature on December 2, 2018, and is earning interest at 1% per annum.
8. INVESTMENTS
A. CARRYING AMOUNT AND FAIR VALUE OF INVESTMENTS
Investments comprise:
2017 2016
Carrying amount
$
Fair value
$
Carrying amount
$
Fair value
$At fair value through profit and loss
- Fixed income securities 14,551 14,551 14,093 14,093- Equities 6,913 6,913 6,296 6,296
TOTAL 21,464 21,464 20,389 20,389
B. INVESTMENT INCOME
2017
$ 2016
$Interest income Fixed income securities - at FVTPL 279 255 Bank deposits 340 115 619 370Dividend income Equities- at FVTPL 130 124
130 124Net realised gains/(losses) on sale of investments Equities - at FVTPL 53 - Fixed income securities - at FVTPL 26 38
79 38Change in fair value arising from Fixed income securities 53 - Equities 566 352 619 352 TOTAL Investment income 1,447 884
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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9. INSURANCE RECEIVABLES AND OTHER ASSETS
2017
$ 2016
$ Hurricane advancements paid to Agents - Irma 41,834 -Accounts receivable 14,852 16,065Hurricane advancements paid to Agents - Maria 12,958 -Ceding commission receivables 3,199 2,862VAT advanced and refund recoverable 1,669 2,180Broker rebate receivable 1,573 968Hurricane advancements paid to Agents - Matthew 1,297 12,082Prepayments 971 739Accrued investment income 156 123
TOTAL 78,509 35,019
10. DEFERRED POLICY ACQUISITION COSTS A reconciliation of the change in deferred policy acquisition costs is shown below:
2017 $
2016 $
At 1 January 7,310 6,460
Recognised deferred acquisition costs 17,248 19,203
Amortisation charge through income (17,194) (18,353)
At 31 December 7,364 7,310
11. REINSURANCE ASSETS Reinsurance assets are comprised of the following:
2017 $
2016$
Short-term insurance contracts:
Claims reported and adjustment expenses recoverable 372,846 27,318Unearned premiums ceded 33,320 25,967Claims incurred but not reported recoverable 171,780 5,982Reinsurance receivables 513 486 TOTAL reinsurance assets 578,459 59,753
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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12. PROPERTY AND EQUIPMENT
Land and buildings
$
Furniture, equipment
and leasehold improvements
$
Computer hardware
$
Motor Vehicles
$
Total
$
At 1 January 2016
Cost 9,046 2,522 1,064 173 12,805
Accumulated amortisation (431) (1,366) (905) (115) (2,817)
Net book value 8,615 1,156 159 58 9,988
Year ended 31 December 2016 Additions - 12 44 - 56Disposals - - - (53) (53)Disposals – accumulated amortisation - - - 26 26Retired - (116) (476) (51) (643)Retired – accumulated amortisation
- 116 476 51 643
Amortisation charge (166) (353) (83) (17) (619)Closing net book value 8,449 815 120 14 9,398
At 31 December 2016 Cost 9,046 2,418 632 69 12,165Accumulated amortisation (597) (1,603) (512) (55) (2,767)Net book value 8,449 815 120 14 9,398
Year ended 31 December 2017 Additions - - 38 34 72Amortisation charge (167) (349) (82) (10) (608)Closing net book value 8,282 466 76 38 8,862
At 31 December 2017 Cost 9,046 2,418 670 103 12,237Accumulated amortisation (764) (1,952) (594) (65) (3,375) TOTAL Net book value 8,282 466 76 38 8,862
13. INCOME TAXES
Income tax is calculated and payable on the profits earned in jurisdictions with corporate tax requirements. The Group is subject to income tax in Antigua 25%, Barbados 25%, Dominica 30%, Grenada 30%, St. Kitts & Nevis 35%, St. Lucia 30%, St. Maarten 34.5%, St. Vincent 30% and US Virgin Islands 37.4%. The Group is domiciled in the Cayman Islands and is exempt from taxation on income earned in the Cayman Islands and other Caribbean jurisdictions.
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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A. INCOME TAX
The income tax expense comprises:
2017
$2016
$
The taxation charge on taxable income differs from the theoretical amount that would arise using the applicable tax rates as follows:
2017
$2016
$
B. DEFERRED TAXES
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Effective December 22, 2017, the Tax Cuts and Jobs Act was enacted into law. As a result of this change, effective January 1, 2018, the statutory tax rate will reduce to 23% (including surtax). As a result, the deferred tax assets have been valued at the 23% rate as at December 31, 2017. The deferred tax asset and deferred tax liability relate to the following items:
2017
$2016
$
Current tax (899) 84
Deferred tax (682) 33
TOTAL Income tax (income)/expense (1,581) 117
Net loss before corporation tax (8,275) (1,030)
Tax at the domestic rate of 0%
Tax calculated at tax rates in countries listed above (2,131) 128
Prior year adjustments (372) (59)
Effect of change in tax rates on taxable income 399 -
Expenses not deductible for tax 556 48
Tax (over)/under accrual (33) -
TOTAL Income tax (income)/expense (1,581) 117
Deferred tax assets:
Net unearned premium - 290
Deferred ceding commissions 251 328
Outstanding claims 12 23
Net operating loss carried forward 866 4
Deferred tax asset 1,129 645
Deferred tax liabilities:
Deferred acquisition costs (468) (683)
Net unearned premium (17) -
Deferred tax liability (485) (683)
Net deferred tax asset/(liability) 644 (38)
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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C. TAX RECEIVABLE (PAYABLE) 2017 2016
$ $ Tax recoverable/(payable) at beginning of year 538 (310) Tax payments made (36) 871 Current tax credit for year 908 (23) Tax over accrual 29 - Total Tax receivable at end of year 1,439 538 Tax payable at beginning of year (61) - Tax payments made 34 Current tax expense for year (9) (61) Tax over accrual (62) Total Tax payable at end of year (98) (61) Net tax receivable
1,341
477
14. INTANGIBLE ASSETS
The carrying amounts of intangible assets are as follows: Finite life
Software
development costs
$
Total $
At 1 January 2016 Cost 2,463 2,463 Accumulated amortisation (2,055)- (2,055)
Net book value 408 408 Year ended 31 December 2016 Disposals (34) (34) Amortisation (100) (100) Closing net book value 274 274 At 31 December 2016 Cost 2,429 2,429 Accumulated amortisation (2,155) (2,155)
Net book value 274 274 Year ended 31 December 2017 Amortisation (100) (100) Closing net book value 174 174 At 31 December 2017 Cost 2,429 2,429 Accumulated amortisation (2,255) (2,255)
TOTAL Net book value 174 174
Impairment losses and the amortisation charge on goodwill and intangibles assets are included in depreciation and amortisation in the consolidated statement of income.
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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B. SOFTWARE DEVELOPMENT COSTS
The Group is engaged in significant development of its new core information systems. Costs associated with the development of the system are deferred, to the extent that the cost satisfies the criteria under IAS 38 – Intangible assets, until such time that management determines that a component is available for use in the manner expected and then it is amortised over its useful life. Annually, the Group reviews its software development costs for evidence of impairment.
15. OTHER LIABILITIES
These include: 2017
$ 2016
$
Hurricane advancements received - Irma 129,530 -Hurricane advancements received - Maria 17,771 -Reinsurance balance payable 14,859 10,725Deferred ceding commission 6,482 5,352Commission payable 2,342 2,689Accounts payable 1,660 1,407Hurricane advancements received - Matthew 1,507 4,500Premium taxes payable 1,497 1,252Profit commission payable 185 723 TOTAL 175,833 26,648
Insurance balances payable include amounts payable to agents, reinsurers and brokers. 16. INSURANCE CONTRACT LIABILITIES
A. COMPOSITION OF INSURANCE CONTRACT LIABILITIES
2017 2016
Gross
$Reinsurance
$Net
$Gross
$Reinsurance
$Net
$
Short term insurance contracts: Claims reported and loss adjustment expenses 376,792 (372,846) 3,946 30,263 (27,318) 2,945Unearned premiums 43,238 (33,320) 9,918 42,084 (25,967) 16,117Claims incurred but not reported 174,398 (171,780) 2,618 8,079 (5,982) 2,097
Total short‐term insurance contracts 594,428 (577,946) 16,482 80,426 (59,267) 21,159
TOTAL Insurance contract liabilities 594,428 (577,946) 16,482 80,426 (59,267) 21,159
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
- 43 -
B. CHANGES IN SHORT TERM INSURANCE CONTRACT LIABILITIES
2017 2016
Gross
$Reinsurance
$Net
$Gross
$Reinsurance
$Net
$At 1 January Claims and adjustment expenses 30,263 (27,318) 2,945 4,931 (2,282) 2,649Claims incurred but not reported 8,079 (5,982) 2,097 2,668 (1,081) 1,587Total at 1 January 38,342 (33,300) 5,042 7,599 (3,363) 4,236 Cash paid for claims settled in year (132,493) 125,520 (6,973) (30,137) 20,400 (9,737)Increase in liabilities: Arising from current-year claims 647,217 (637,298) 9,919 61,642 (50,379) 11,263Arising from prior-year claims (1,876) 452 (1,424) (762) 42 (720) TOTAL at 31 December 551,190 (544,625) 6,564 38,342 (33,300) 5,042 Claims and adjustment expenses 376,792 (372,846) 3,946 30,263 (27,318) 2,945Claims incurred but not reported 174,398 (171,780) 2,618 8,079 (5,982) 2,097TOTAL at 31 December 551,190 (544,626) 6,564 38,342 (33,300) 5,042
C. UNEARNED PREMIUM LIABILITY
2017 2016
Gross
$ Reinsurance
$ Net$
Gross $
Reinsurance$
Net$
At 1 January 42,084 (25,967) 16,117 40,795 (23,847) 16,948
Premium written during the year 93,955 (87,988) 5,967 92,596 (68,380) 24,216
Premium earned during the year (92,801) 80,635 (12,166) (91,307) 66,260 (25,047) TOTAL at 31 December 43,238 (33,320) 9,918 42,084 (25,967) 16,117 Movement during the year, net of acquisition (1,154) 7,353 6,199 (1,289) 2,120 831
17. EQUITY
A. SHARE CAPITAL
2017
$ 2016
$ 500,000 (2016 - 500,000) common shares of a par value of $1 each 500 500 Issued - Common shares of a par value of $1 each 321 321
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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Common shares in issue in the Group rank pari passu with any new common shares issued in the Group. All the common shares in issue carry the same right to receive all dividends and other distributions declared, made or paid by the Group. No shares were issued in 2017 or 2016. B. CONTRIBUTED SURPLUS The contributed surplus has the same characteristics, terms, rights and obligations as “Share Premium” as defined in the Cayman Islands Companies Law and the contributed surplus was made with the intention and expectation that it be recorded as a component of equity by the Company. During the year a capital contribution of $10m was recorded by the Group, with a corresponding intercompany payable forgiveness by the Parent. C. ACCUMULATED OTHER COMPREHENSIVE LOSS This consists of actuarial gains and losses on employee benefit plans. 18. INSURANCE CONTRACTS BENEFITS AND EXPENSES
19. OPERATING EXPENSES
2017 2016
$ $
Wages and salaries 4,769 5,730 IT maintenance contracts 1,197 597 Professional and consulting fees 880 820 Advertising and business development 558 861 Compliance, legal and regulatory 354 254 Bank charges and foreign currency purchase tax 351 430 Office rent, building and utilities costs 349 634 Office and administration expenses 273 135 Share expense (note 20) 250 201 Travel 175 228 Membership and subscriptions 53 54 Training and development 28 31 Other 10 6 Bad debt 2 - TOTAL Operating expenses 9,249 9,981
2017 2016 $ $ Gross short term claim and adjustment expenses paid 132,493 30,137 Reinsurance recoveries (636,847) (50,336) Change in insurance contract liabilities 512,849 30,742 Total short term claim and adjustment expenses 8,495 10,543 TOTAL Insurance contracts benefits and expenses 8,495 10,543
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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20. RELATED PARTIES As disclosed in Note 2Ci), a number of the subsidiaries transacted within the Group during the year in the normal course of business. These transactions are eliminated on consolidation. By their nature, not all related party transactions are at arm’s length. On occasion, the Group pays certain expenses on behalf of other fellow subsidiaries / affiliates of the Ultimate Parent, and which are then reimbursed. As at December 31, 2017 amounts due to the Ultimate Parent and its subsidiaries / affiliates have yet to be settled. Key management personnel have been defined as the executive team and the board of directors of the Group. The following transactions were carried out with key management:
A. SALES OF INSURANCE CONTRACTS AND OTHER SERVICES
2017$
2016$
- BF&M Limited – Insurance contracts 3,836 1,921- BF&M Limited – Hurricane Irma recoveries (2,506) -- BF&M Limited – Hurricane Maria recoveries (174) -- BF&M Limited – Other 1,459 601- Key management 39 39 TOTAL 2,654 2,561
B. PURCHASE OF PRODUCTS AND SERVICES
2017$
2016$
- Insurance contracts benefits & expenses - Key management (claim payment) - (1)- Employee life insurance expense – BF&M Limited (62) (64)- Share grant expenses (270) (201)- Operating expenses – BF&M Limited (operational cost allocation) (2,196) (1,345) TOTAL (2,528) (1,611)
C. KEY MANAGEMENT COMPENSATION
The following table shows compensation to key management: 2017 2016 $ $
Salaries and other short-term employee benefits 1,206 970Post-employment benefits - -Other long-term benefits 29 32Share based payments 250 201 TOTAL 1,485 1,203
D. DUE TO RELATED PARTIES 2017 2016 $ $Due to ultimate parent (9,969) (14,995)
E. SELF‐INSURANCE
The Group self‐insures their office buildings reported in property and equipment. The insured asset is reinsured through the Group’s reinsurance programme and is subject to the same terms and conditions as other reinsured insurance contracts.
ISLAND HERITAGE INSURANCE COMPANY, LTD. Notes to consolidated financial statements For the year ended 31 December 2017 (in thousands of United States dollars except share and per share amounts)
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21. COMMITMENTS AND CONTINGENCIES
A. OPERATING LEASES
On November 22, 2016, the Group renewed a licensing agreement with The Governor of the Cayman Islands to sponsor and take over the responsibilities of maintenance, horticultural and aesthetic appearance of a roundabout on Grand Cayman. This agreement is valid for a period of 5 years with an option to extend. The cost of maintenance is estimated to be $124 (2016: $165) for the remaining lease period and will be expensed through the statement of comprehensive income when incurred. Included within the operating expenses are operating lease expenses of $74 (2016: $73).